Government unlikely to replace the Income Tax Act with direct tax code.

The government may tweak the existing Income Tax Act, instead of introducing the direct tax code (DTC). It is very likely that only selected suggestions from the newly drafted law will be incorporated in the existing law. This move will avoid uncertainty for businesses in India which are already suffering from an economic slowdown. 

Some provisions from the draft legislation will be added to the existing laws through amendments in the next Budget session of the parliament. The amendments will make the law modern and capable of dealing with different business models by incorporating best practices from all over the globe. 

The idea to replace the almost six-decade-old law with the new DTC is now less appealing to the government. As it may unsettle the well-established legislation which will, in turn, create uncertainty for businesses that are suffering from a deep economic slowdown.

Also Read: New DTC: Speculated to Include Alternate Dispute Resolution Mechanism

The report submitted by the expert panel has not been made public by the finance ministry until today. The report proposed to provide relief to the taxpayers by changing the tax rate for both local and foreign companies to 25% across-the-board, changing in an individual income tax slabs and much more. 

A plethora of sub-rules, exemptions and carve-outs, which made the law complex, are meant for specific needs of different industries and section of individuals. If the law is simplified to a greater extent, it won’t last in a dynamic economy like India’s economy. 

The timing of policy changes is very vital as the taxpayers may not prefer radical changes in the legislation coincided with the economic downturn. As of today, the taxpayers now how to navigate the existing law and may get affected by the introduction of new policies. 

The previous government tried to introduce the direct tax code at the beginning of this decade but didn’t. All its proposals along with General Anti Avoidance Rules were inserted in the Income Tax Act, 1961.

The current Finance Ministry’s idea is to amend the existing act with the insights from the detailed review of the expert panel so that the old act becomes capable of dealing with the trends of capital and profits movement across borders. 

Besides the introduction of new laws or amending the old one, tax rates are continuously amended through Finance Act annually. The Finance Act 2019 passed in July 2019 has already taken forward the Modi government’s plan of making taxation more progressive, with the higher tax rate for high-income earners.

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